Winding up of a company

Winding up of a company is the stage, where by the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to discharge the liabilities on a priority basis.

MODES OF WINDING UP:

There are three ways, in which a company may be wound up. They are:

A.   Winding up by the court.

B.    Voluntary winding up:

Members Voluntary winding up.

Creditors Voluntary winding up.

C.   Winding up subject to supervision of the court

A.  WINDING UP BY THE COURT:

 A company may be wound up by the court in following situations. Here, the court means "High Court".

i.    If the company itself, has passed a special resolution in the general meeting to wound up its affairs. Special resolution means, resolution passed by three-fourth (3/4") of the members present.

ii.    If there is a default, in holding the statutory meeting or in delivering the statutory report to the Registrar.

A company which is limited by shares, and a company limited by guarantee having share capital, is required to hold a " Statutory meeting" of its members, within six months, and after one month, from the date of commencement of it's business. A statutory report of the meeting so held shall also be forwarded to the registrar. [Sec 165 (1) & (5)]

iii.     If the company fails to commence its business within one year from the date of it's incorporation, or suspends its business for a whole year.

A company limited by shares, has to obtain a "certificate of commencement" of business from the registrar. Unless it obtains such certificate, it cannot carry on its business operation.

iv.     If the number of members, in a public company is reduced to less than seven, and in case of private company less than two.

The statutory requirement of minimum number of members in a public company is seven, and in case of private company, it is two (sec 12)

v.      If the company is unable to pay its debits; where the financial position of the company is, such, that it has more liabilities than assets, and after disposing off the assets, it is still unable to extinguish it's liabilities, it means that company is unable to pay it's debts.

 vi.     If the court, itself is of the opinion that the company should be wound up.

The court may form such an opinion, if it comes to the knowledge of court that, the company is mismanaged, or financially unsound, or carrying an illegal operations etc.

RELEVANT POINTS:

A. WHO CAN APPLY TO COURT, FOR WINDING UP PETITION? (SEC 439)

Following persons can apply to the court, for petition for winding up:

o        The company itself

o        The creditor

o        Any Contributory

o        Registrar

O      Any person authorized by central government, in case of oppression or mismanagement (397)

B. WHAT ORDERS, THE COURT MAY PASS? (SEC 443)

The court may pass any one of the following orders on hearing the winding up petition.

 i.     Dismiss it, with or without costs

 ii.    Make any interim order, as it thinks fit, or

 iii.   Pass an order for winding up of the company with or without costs.

Consequences of court passing an order for winding up:

If the court is satisfied, that sufficient reasons exist in the petition for winding up, then it will pass a winding up order. Once the winding up order is passed, following consequences follow:

i.     Court will send notice to an official liquidator, to take change of the company. He shall carry out the process of winding up, ( sec. 444)

ii.    The winding up order, shall be applicable on all the creditors and contributories, whether they have filed the winding up petition or not.

iii.   The official liquidator is appointed by central Government ( sec. 448)

iv.   The company shall relevant particulars, relating to, assets, cash in hand, bank balance, liabilities, particulars of creditors etc, to the official liquidator. ( sec. 454)

v.    The official liquidator shall within six months, from the date of winding up order, submit a preliminary report to the court regarding :

o        Particulars of Capital

o        Cash and negotiable securities

o        Liabilities

o        Movable and immovable properties

o        Unpaid calls, and

o        An opinion, whether further inquiry is required or not ( 455)

The Central Govt. shall keep a cognizance over the functioning of official liquidator, and may require him to answer any inquiry. (463)

C. STAY ORDER:

Where, the court has passed a winding up order, it may stay the proceedings of winding up , on an application filed by official liquidator, or creditor or any contributory. (466)

D. DISSOLUTION OF COMPANY (481)

Finally the court will order for dissolution of the company, when:

o        the affairs of the company are completely wound up, or

o        the official liquidator is unable to carry on the winding up procedure for want of funds.

E. APPEAL: 483

An appeal from the decision of court will lie before that court, before whom, appeals lie from any order or decision of the former court in cases within its ordinary jurisdiction.

B.  VOLUNTARY WINDING UP

A company may, voluntary wind up its affairs, if it is unable to carry on its business, or if it was formed only for a limited purpose, or if it is unable to meet its financial obligation, and etc. A company may voluntary wind up itself, under any of the two modes:

i.     Members voluntarily winding up

ii.    Creditors voluntarily winding up

A company may voluntarily wind up itself, either by passing:

An ordinary resolution, where the purpose for which the company was formed has completed, or the time limit for which the company was formed, has expired.

Or

By way of special resolution

Both types of resolution shall e passed in the general meeting of the company. (484)

Once the resolution of voluntarily winding up is passed, and then the company may be wound up, either through:

O     Members voluntarily winding up, or

o     Creditors voluntarily winding up

The only difference between the abate two, is that in case of members voluntarily winding up, Board of Directors have to make a declaration to the effect, that company has no debts. (488)

 

                   i.            MEMBERS VOLUNTARILY WINDING UP

Directors of the company shall call for a Board of Directors Meeting, and make a declaration  of winding up, accompanied by an Affidavit, stating that;

o        The company has no debts to pay, or

o        The company will repay it's debts; if any, within 3 years from the commencement of winding up, as specified in declaration (488)

WHO SHALL CARRY OUT THE WINDING UP PROCEDURE? & WHAT SHALL BE THE PROCEDURE?

· The Company shall appoint one or more liquidators, in a general meeting, who shall look after the affair of winding up procedure, and distribution of assets. [490 (1)]

· The liquidator so appointed, shall be paid remuneration for his services, which shall also be fixed in general meeting [490 (2)]

 · The Company shall also give notice of appointment of liquidator to the registrar within ten days of appointment (493)

· Once the company has appointed liquidator, the powers of Board of Directors, Managing Director, and Manager, shall cease to exist. (491)

· The liquidator is generally given a free hand, to carry out the winding up procedure, in such a manner, as he thinks best in the interest of creditors, and company.

· In case, the winding up procedure, takes more than one year, then liquidator will have to call a general meeting, at the end of each year, and he shall present, a complete account of the procedure, and position of liquidator (496)

WHEN AFFAIRS OF THE COMPANY ARE FULLY WOUND UP

The liquidator shall take the following steps, when affairs of the company are fully wound up : (497)

i.    Call a general meeting of the members of the company, a lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of.

ii.    The meeting shall be called by advertisement, specifying the time, place and object of the meeting.

iii.  The liquidator shall send to, the Registrar and official Liquidator copy of account, within one week of the meeting.

iv.  If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it's members, or public, then the company shall be deemed to be dissolved from the date of report to the court.

v.     However, if official liquidator comes to a finding, that affair have been carried in a manner prejudicial to interest of member or public, then court may direct the liquidator to investigate furthers.

ii. CREDITORS VOLUNTARILY WINDING UP

· Where the resolution for winding up has been passed, but the Board of Directors are not in a position to give a declaration on the liability of company, they may call a meeting of creditors, for the purpose of winding up. (500)

· It is the duty of Board of Directors, to present a full statement of company’s affairs, and list of creditors along with their dues, before the meeting of creditors. [500 (3)]

· Whatever resolution, the company passes in creditor's meeting, shall be given to the Registrar within ten days of its passing. (501)

WHO SHALL CARRY OUT THE WINDING UP PROCEDURE ? & WHAT SHALL BE THE PROCEDURE?

· Company in the general meeting [in which resolution for winding up is passed], and the creditors in their meeting, appoint liquidator. They may either agree on one liquidator, or if two names are suggested, then liquidator appointed by creditor shall act. (502)

· Any director, member or creditor may approach the court, for direction that:

o        Liquidator appointed in general meeting shall act, or

o        He shall act jointly with liquidator appointed by creditor, or

o        Appointing official liquidator, or

o        Some other person to be appointed as liquidator. [502 (2)]

· The remuneration of liquidator shall be fixed by the creditors, or by the court. (504)

· On appointment of liquidator, all the power of Board of Directors shall cease. (505)

· In case, the winding up procedure, takes more than one year, then he will have to call a general meeting, and meeting of creditors, at the end of each year, and he shall present, a complete account of the procedure, and the status / position of liquidation (505).

WHEN AFFAIRS OF THE COMPANY ARE FULLY WOUND UP ( 509)

The liquidator shall take the following steps, when affair of the company are fully wound up:

I.            Call a general meeting, and meeting of creditors, and lay before it, complete picture of accounts, winding up procedure and how the properties of company are disposed of.

II.            The meeting shall be called by advertisement, specifying the time, place and object of the meeting.

 III.            The liquidator shall send to the Registrar and official liquidator copy of account, within one week after the meeting.

 IV.            If from the report, official liquidator comes to the conclusion, that affairs of the company are not being carried in manner prejudicial to the interest of it’s members or public, then the company shall be deemed to be dissolved, from the date of report to the court.

    V.            However, if official liquidator comes to a finding, that affairs have been carried in a manner prejudicial to intent of members or public, and then court may direct the liquidator to investigate further.

DISTRIBUTION OF PROPERTY OF COMPANY ON VOLUNTARILY WINDING UP [BOTH MEMBERS AND CREDITORS VOLUNTARILY WINDING UP]

Once the company is fully wound up, and assets of the company sold or distributed, the proceedings collected are utilized to pay off the liabilities. The proceedings so collected shall be utilized to pay off the creditors in equal proportion. Thereafter any money or property left may be distributed among members according to their rights and interests in the company.

C.  WINDING UP SUBJECT TO SUPERVISION OF COURT.

Winding up subject to supervision of court, is different from "Winding up by court."

Here the court only supervises the winding up procedure. Resolution for winding up is passed by members in the general meeting. It is only for some specific reasons, that court may supervise the winding up proceedings. The court may put up some special terms and conditions also.

However, liberty is granted to creditors, contributories or other to apply to court for some relief. (522)

· The court may also appoint liquidators, in addition to already appointed, or remove any such liquidator. The court may also appoint the official liquidator, as a liquidator to fill up the vacancy.

· Liquidator is entitled to do all such things and acts, as he thinks best in the interest of company. He shall enjoy the same powers, as if the company is being wound-up voluntarily.

· The court also may exercise powers to enforce calls made by the liquidators, and such other powers, as if an order has been made for winding up the company altogether by court. ( 526)

PRIORITY IN DISPOSING LIABILITIES [529 A & 530]

When the company is wound up, by any mode, the liabilities shall be discharged in following priority.

1.     Workman's dues.

2.     Debts due to secured creditors, in case of insolvency.

3.     All ---------, taxes, cesses and rates due from the company to the central government or a state govt.

4.     All wages and salary of any employee due within four months.

5.     All -------- holiday remuneration becoming payable to any employee.

· All such debts shall be paid in full. If assets are insufficient to meet them, they shall abate in equal proportions.

MONEY RECEIVED BY LIQUIDATOR: (553)

Apart from an official liquidator, every liquidator appointed by company or court to carry on the winding up procedure, shall deposit the money is received by him in a scheduled bank, to the credit of a special banking account opened by him.

Apart from a normal company, registered under the companies Act, 1956 there are other companies as well winding up procedure for these companies are bit different from a company registered under companies Act.

These companies are:

1.     UNREGISTERED COMPANIES : (583)

In simple words, an unregistered company is a company which is not registered or covered under provisions of companies Act. 1956 (582)

· An unregistered company cannot be wound up voluntarily, or, subject to super vision of court.

· However, the circumstances, in which unregistered company may be wound up, are as follows:

o         If the company, is dissolved, or has ceased to carry on business, or is carrying on business only for the purposes of winding up, it's affairs,

o         If the company is unable to pay it's debt

o         If the court is of opinion, that it is just and equitable, that the company should be wound up.

· A creditor, contributory, or company itself by filing a petition, or any person authorized by central government may institute winding up proceedings.

· In respect to other aspects, the same provisions and procedure shall follow, as in winding up of registered company.

· A foreign company, carrying on business in India, which has been dissolved, may be wound up, as unregistered company.

1.     FOREIGN COMPANY ( 584)

A foreign company is a company which is incorporated outside India, and having a place of business in India.

Winding up of such companies is only limited to the extent of it's assets in India. In respect of assets and business carried outside India, Indian courts have no jurisdiction.

· Winding up of a foreign company can only be made through court.

· Even if the company had been dissolved or ceased to exist in the country of its incorporation, winding up order in this country can be made.

· Even if a foreign company has been wound up according to foreign law, the courts in India still protect the Indian Creditors. The surplus assets, after paying the creditors, should be distributed among the share holders equally in the same proportion, as the assets ---- to the total issued and paid up capital.

· Pendency of a foreign liquidation does not affect the jurisdiction to make winding up order. The Assets can be of any nature and do not take to be in the ownership of the company and can come from any Source.

· As, for persons claiming to be creditors, their presence, itself is sufficient. It is not required to be shown, that company carried on business operations from any place of business in India.

2.     GOVERNMENT COMPANY

 A Govt. company, means a company, in which 51% or more of, shares are held by a govt. company

Winding up procedure for a government company registered under the companies Act, 1956, is nearly similar to normal winding up procedure.

However, courts, take interest of public into consideration, and priority is given to them, as a govt. company is main function is to provide services to public.

 

 Source http://www.companyliquidator.gov.in/12/windingup_data.htm#b

Companies Act,2013

The new Companies Act (hereinafter referred as CA2013) is replacing old Companies Act, 1956 (hereinafter referred as CA1956). The CA2013 makes comprehensive provisions to govern all listed and unlisted companies in the country. The CA2013 is partially made effective w.e.f. 12^th September, 2013, by way of implementing 98 Sections and repealing the relevant sections corresponded with CA1956. Some of the Salient features of the CA2013 are as under:

1. Democracy of Shareholders: The CA2013 has introduced new concept of class action suits with a view of making shareholders and other stakeholders, more informed and knowledgeable about their rights.
2. Supremacy of Shareholders: The CA2013 focused and provide major aspect on approvals from shareholders on various significant transactions. The Government has rightly reduced the need for the companies to seek approvals to managerial remuneration and the shareholders have been vested with the power to sanction the limit.
3. Strengthening Women Contributions through Board Room:The CA2013 stipulates appointment of at least one woman Director on the Board of the prescribed class of Companies so as to widen the talent pool enabling big Corporates to benefit from diversified backgrounds with different viewpoints.
4. Corporate Social Responsibility: The CA2013 stipulates certain class of Companies to spend a certain amount of money every year on activities/initiatives reflecting Corporate Social Responsibility.  There may be difficulties in implementing in the initial years but this measure would help in improving the Under-privileged & backward sections of Society and the Corporate would in fact gain in terms of their reputation and image in the Society.
5. National Company Law Tribunal: The CA2013 introduced National Company Law Tribunal and the National Company Law Appellate Tribunal to replace the Company Law Board and Board for Industrial and Financial Reconstruction. They would relieve the Courts of their burden while simultaneously providing specialized justice.
6. Fast Track Mergers: The CA2013 proposes a fast track and simplified procedure for mergers and amalgamations of certain class of companies such as holding and subsidiary, and small companies after obtaining approval of the Indian government.
7. Cross Border Mergers:The CA2013 permits cross border mergers, both ways; a foreign company merging with an India Company and vice versa but with prior permission of RBI.
8. Prohibition on forward dealings and insider trading: The CA2013 prohibits directors and key managerial personnel from purchasing call and put options of shares of the company, its holding company and its subsidiary and associate companies as if such person is reasonably expected to have access to price-sensitive information (being information which, if published, is likely to affect the price of the company's securities).  Earlier these provisions were contained in regulations framed by SEBI, as the capital market regulator. Now, it has also been informed that SEBI is expected to discuss changes in certain norms for listed firms so as to make them in line with the rules in the new Act.
9. Increase in number of Shareholders: The CA 2013 increased the number of maximum shareholders in a private company from 50 to 200.
10. Limit on Maximum Partners: The maximum number of persons/partners in any association/partnership may be upto such number as may be prescribed but not exceeding one hundred. This restriction will not apply to an association or partnership, constituted by professionals like lawyer, chartered accountants, company secretaries, etc. who are governed by their special laws. Under the CA1956, there was a limit of maximum 20 persons/partners and there was no exemption granted to the professionals.
11. One Person Company: The CA2013 provides new form of private company, i.e., one person company is introduced that may have only one director and one shareholder. The CA1956 requires minimum two shareholders and two directors in case of a private company.
12. Entrenchment in Articles of Association: The CA2013 provides for entrenchment of articles of association have been introduced.
13. Electronic Mode: The CA2013 proposed E-Governance for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company's website, etc.
14. Restriction on Composition: Every company shall have at least one director who has stayed in India for a total period of not less than 182 (one hundred and eighty two) days in the previous calendar year.
15. Independent Directors: The CA2013 provides that all listed companies should have at least one-third of the Board as independent directors. Such other class or classes of public companies as may be prescribed by the Central Government shall also be required to appoint independent directors. No independent director shall hold office for more than two consecutive terms of five years.
16. Serving Notice of Board Meeting: The CA2013 requires at least seven days' notice to call a board meeting. The notice may be sent by electronic means to every director at his address registered with the company. The CA1956 did not prescribe any notice period to call the board meeting of a company.
17. Duties of Director defined: Under the CA1956, a director had fiduciary duties towards a company. However, the CA2013 has NOW defined the duties of a director.
18. Liability on Directors and Officers: The CA2013 does not restrict an Indian company from indemnifying its directors and officers like the CA1956.
19. Rotation of Auditors: The CA2013 provides for rotation of auditors and audit firms in case of publicly traded companies.
20. Auditors performing Non-Audit Services: The CA2013 prohibits Auditors from performing non-audit services to the company where they are auditor to ensure independence and accountability of auditor.  
21. Financial Year: Every company's financial year will be the period ending on 31 March every year.
22. Rehabilitation and Liquidation Process: The entire rehabilitation and liquidation process of the companies in financial crisis has been made time bound under CA2013.

Source: .http://www.mondaq.com/india/x/270182/Corporate+Commercial+Law/Indian+Companies+Act+2013+A+New+Beginning

Winding Up of a Company - A different Legal Perspective

Meaning & Kinds: “Winding-up” in literal sense, means to bring to a conclusion or an end by putting in order.[1] It is defined as the process by which the life of a company is ended and its property is administered for the benefit of its members and creditors[2]. Winding-up is different from insolvency and dissolution[3]. The Act provides for three kinds of winding up:

1. The winding-up by the Tribunal. [(Sec 433) of Companies Act, 1956]

· If the company has, by special resolution, resolved that the company may be wound-up by the tribunal;

· If default is made in delivering the statutory report to the registrar or in holding the statutory meeting;

· If the company does not commence its business within a year from its incorporation, or suspends its business for whole of a year;

· If the number of members are reduced then their required number;

· If the company is unable to pay its debts (specified in Sec 434)

· If the tribunal is of the opinion that it is just and equitable that the company should be wound –up;

· If the company is in default in filing up with the Registrar its balance sheet and profit and loss account for five consecutive financial years[4];

· If the company has acted against the interests of the sovereignty and integrity of India or security of any state, friendly relation with foreign States, public order, decency and morality;

· If the tribunal is under the opinion that the company should be wound up under the circumstances specified under the Sec. 424G.

2. Voluntary winding-up, which itself is of two kinds, namely,

· Members voluntary winding-up,

· Creditors voluntary winding-up.

A company may be wound up voluntarily at any time after passing a special resolution. But where the articles provide for a period on expiry, which the company is to be wound up and that period has expired, or for a contingency on the happening of which the company is to be dissolved and that contingency has happened, winding up may be commenced with an ordinary resolution [Sec 484]. Within 14 days the resolution should be advertised in the Official Gazette and in a newspaper circulating in the district of the registered office of the company [Sec 485]. Winding up commences from the date of resolution [Sec 486]. The corporate status and power of the company shall continue till the company is completely dissolved, but it shall stop its business, except so far as may be necessary for beneficial winding up [Sec 488]. If a declaration of solvency is made in accordance with the provisions of the Act, it will be members’ winding up. If the directors are not able to pay the debts within the specified period, the liquidator shall call a meeting of the creditors and it then becomes the creditor’s winding up [sec.495&Sec.498].

Is winding up possible during the pendency of a civil suit?

Section 433 of the Act provides for the circumstances in which a company may be wound up by court. [5] Here arises a question that if there are parallel proceedings for the same subject matter i.e., for the recovery of debt, where one is a civil suit and the other is for winding up of the company, should they be allowed to subsist together?

The act nowhere prohibits that the proceedings under the act shall or could not lie, where civil suits are pending or they subsequently be filed. There is no provision in the Act to oust the jurisdiction of the court and decide the winding up proceedings. There would have been a provision to that effect in the Act if the legislature had intended to that effect. Since the winding up proceeding is not merely for the benefit of the petitioner but of all its shareholders, creditors or contributories [6]. The pendency of a civil suit is not a bar to the admission of winding up petition based on same debt.[7] The proceeding for winding up will not be invalidated if a suit is filed by the petitioner by way of abundant caution to save the claim getting barred by limitation[8].

The winding up proceedings can be continued in a company court once it has come to the conclusion that it has not been a case of bona fide and tenable defence is made out [9]. While dismissing the petition for winding up the following principals have to be relied upon by the Court:

1) The defence of the company is in good faith and one of substance.

2) The defence is likely to succeed in point of law.

3) The company adduces prima facie proof of the facts on which the defence depends.

4) Where the debt is undisputed, the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular amount and.

5) Where, the company owes the creditor a debt entitling him to a winding up order. But the exact amount of the debt is disputed; the Court will make the winding up order without requiring the creditor to quantify the debt precisely [10].

The following points have to be considered while dealing with winding-up:

1) A petition presented ostensibly for a winding-up order; but really to exercise pressure will be dismissed, and under the circumstances, may be stigmatized as a scandalous abuse of the process of the Court The modern practice has been to dismiss such petitions. If the debt is not disputed on some substantial ground, the Court may decide it on the petition and make the order. [11]

2) The company may be wound up even if it has large assets. The crux is to see if it is unable to meet its current demands i.e., if the current liabilities are more than the current assets. If the company is financially sound and in a position to pay its liability, it cannot be ordered to be wound up under Section 433(e) of the Companies Act. But the company should establish that it is capable of discharging its existing liabilities. There is presumption of inability [12].

3) Although a winding up petition is an appropriate remedy and a mode of execution against a company unable to pay its debt, it is not an alternative to the ordinary procedure for realization of the debts due from the company. Since, the creditor had already resorted to the civil suit; the court in its discretion can dismiss the petition [13].

4) It has been observed that the pendency of a civil suit as such is not merely a ground to oppose a winding up petition [14].

Conclusion

After analyzing and observing various legal propositions and situations, it is found that the right to apply for winding up is the creature of statute and not of contract, d the winding up orders passed by the court are not judgments in rem. In the absence of any prohibited provisions in the Act winding up proceedings u/s 433(e), 434,439 can be allowed even if a civil suit is already pending against the debtor company. But it should be marked that the winding up proceeding are greatly affected by the facts and circumstances of a particular case. The machinery of winding-up cannot be used as a pressure tactics, where a suit has already been instituted for recovery of debt, under such circumstances, the proceeding are in the nature of parallel proceedings in respect of the same cause of action. As a result, such course should not be considered by the court more so to avoid conflict of jurisdiction of findings by two parallel courts of competent jurisdiction. Thus at last it can be said that a genuine case has to be made out rejecting the malafide contention, in the interest of good faith and justice.

http://www.legalserviceindia.com/article/l62-Winding-Up-of-a-Company---A-different-Legal-Perspective..html

Company Law Board may compound the offence, permission of court not required.

Supreme Court held that Company Law Board does not need permission of court u/s 621A(7) of Companies Act 1956 for compounding of offence under the Companies Act, 1956 involving imprisonment or with fine or with both. Court has held that in such cases both Company Law Board and Court have power to compound the offence.

                                                                  REPORTABLE


                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO. 2102 OF 2004


V.L.S. FINANCE LTD.                          …APPELLANT

                                   VERSUS

UNION OF INDIA & ORS.                       …RESPONDENTS



                                  JUDGMENT



CHANDRAMAULI KR. PRASAD,J.


      This appeal by special leave arises out  of  an  order  dated  5th  of
November, 2003 passed by the Company Judge,  Delhi  High  Court  in  Company
Appeal (B) No. 1 of 2001 whereby it has dismissed the appeal  assailing  the
order of the Company Law Board allowing the  compounding  of  offence  under
Section 211(7) of the Companies Act.

      Short facts giving rise to the present appeal are that  the  Registrar
of Companies, NCT of Delhi and Haryana laid complaint in the Court of  Chief
Metropolitan Magistrate, Tis Hazari, inter alia  alleging  that  during  the
course of inspection  it  was  noticed  in  the  balance  sheet  of  1995-96
Schedule of the fixed assets included land worth Rs. 21  crores.   According
to the complaint,      M/s. Sunair Hotels Ltd.,  for  short  ‘the  Company”,
had taken this land from New Delhi Municipal Corporation on licence and  the
Company only pays the yearly licence fee thereof.  Thus,  according  to  the
complainant, without any right land has been shown as land in  the  Schedule
of fixed assets, which is not a true and  fair  view  and  punishable  under
Section 211(7) of the Companies Act, hereinafter referred to as  “the  Act”.
The Company and its Chairman-cum-Managing Director, S.P. Gupta were  arrayed
as accused.


      However, before the court in seisin of the case could proceed with the
complaint,  the  Company  and  its  Managing  Director  jointly   filed   an
application before the Company Law Board for compounding the  offence.   The
Northern Region Bench of the Company Law Board, by its order  dated  9th  of
August, 2000 acceded to the prayer and compounded the  offence  against  the
Managing Director on payment of      Rs. 1000/- for each offence each  year.
 While doing so, the Company Law Board has held as follows:




           “…The exercise of powers by the Company Law Board under  621A(1)
           is independent of exercise of powers by  the  court  under  sub-
           section  (7)  and  all  offences  other  than  those  which  are
           punishable with imprisonment only or with imprisonment and  also
           fine, can  be  compounded  by  Company  Law  Board  without  any
           reference to sub-section (7), even in cases where prosecution is
           pending in a criminal court.  Thus, it is clear that Company Law
           Board if so approached can compound offences and in such case no
           prior permission of the Court is necessary.”






      Aggrieved by the same, appellant preferred Company Appeal  before  the
High Court, inter alia, contending that the power of  compounding  could  be
exercised by the criminal court and not by  the  Company  Law  Board.   Said
submission has not found favour and the Company Judge, in  this  connection,
observed as follows:




           “18. In the light of the aforesaid discussions, it is held  that
           the person seeking compounding of an offence in accordance  with
           the procedure laid down in the Criminal Procedure Code can do so
           before the criminal Court with the permission of the Court under
           sub-section (7) of Section  621A  of  the  Act,  which  normally
           cannot be done under the provisions of  the  Criminal  Procedure
           Code.  Such compounding of offence would always be relatable  to
           the offence punishable with imprisonment or with  fine  or  with
           both as is made clear under clauses (a) and (b)  of  sub-section
           (7).  Under the aforesaid  sub-section  the  offence  punishable
           with imprisonment or with fine or  both  shall  be  compoundable
           with the permission of the Court and for  such  compounding  the
           procedure laid down under the Criminal Procedure Code is  to  be
           followed in that regard provided the prosecution is  pending  in
           that Court.  I also hold the Company Law Board can  compound  an
           offence of the nature prescribed under  sub-section  (1)  either
           before the institution of the criminal proceeding or even  after
           institution of the criminal proceeding and the said power is not
           subject to the provisions of sub-section (7).  Both are parallel
           powers to be exercised by the prescribed  authorities  who  have
           been empowered under the statute and one power is not  dependent
           on the other……”




       Accordingly, the Company Judge dismissed the appeal.


      That is how the appellant is before us.


      We have heard Mr. R. Shankaranarayanan, for the  appellant,  Ms.  Binu
Tamta, for the respondent-Union of India  and  Mr.  Jayant  Bhushan,  Senior
Advocate for the Company and its Managing Director.


      It is an admitted position  that  the  allegations  made  exposed  the
accused to an offence punishable under Section 211(7) of the Act.  The  same
reads as under:

1 “211. Form and contents of balance-sheet and profit and loss account.—


2 xxx            xxx                    xxx

           (7) If any such person as is referred to in sub-section  (6)  of
           section 209  fails  to  take  all  reasonable  steps  to  secure
           compliance by the company, as respects any accounts laid  before
           the company in general meeting,  with  the  provisions  of  this
           section and with the other requirements of this Act  as  to  the
           matters to be stated in the accounts, he shall,  in  respect  of
           each offence, be punishable with imprisonment for a  term  which
           may extend to six months, or with fine which may extend  to  ten
           thousand rupees, or with both:
                 Provided that  in  any  proceedings  against  a  person  in
           respect of an offence under this section, it shall be a  defence
           to prove that a competent and reliable person was  charged  with
           the duty of seeing that the provisions of this section  and  the
           other requirements aforesaid were complied with  and  was  in  a
           position to discharge that duty:
                 Provided further that  no  person  shall  be  sentenced  to
           imprisonment for  any  such  offence  unless  it  was  committed
           wilfully.


                 xxx         xxx              xxx”




      Thus, the offence alleged is punishable with imprisonment for  a  term
which  may  extend  to  six  months  or  with  fine  which  may  extend   to
Rs. 10,000/- or with both.


      Mr. Shankaranarayanan has taken an extreme stand before this Court and
contends that the Company Law Board  has  no  jurisdiction  to  compound  an
offence punishable under  Section  211(7)  of  the  Act  as  the  punishment
provided  is  imprisonment  also.   Mr.  Bhushan,  however,   submits   that
imprisonment is not mandatory punishment under Section  211(7)  of  the  Act
and, hence, the Company Law Board has the authority to  compound  the  same.
He also points out that this submission was not at all advanced  before  the
Company Law Board and, therefore,  the  appellant  cannot  be  permitted  to
raise this question for the first time before this Court.   We  are  not  in
agreement with Mr. Bhushan in regard to his plea that this  question  cannot
be gone into by this Court at the first instance.   In  our  opinion,  in  a
case in which the facts pleaded give rise to a pure question  of  law  going
to the root of the matter, this Court possesses discretion to go into  that.
 The position would have been different had  the  appellant  for  the  first
time prayed before this Court for adjudication on an issue of fact and  then
to apply the law and hold that Company Law  Board  had  no  jurisdiction  to
compound the offence.


      Here, it is an admitted position that the allegation made exposed  the
Company and its Managing Director for punishment  under  Section  211(7)  of
the Act which provides for imprisonment or fine or with both.  In  the  face
of the same, no fact needs to be adjudicated and  the  point  being  a  pure
question of law going to the root of the matter, same can  be  permitted  to
be raised before this Court for the first time.  But that does not help  the
appellant as we are inclined to accept the  submission  of  Mr.  Bhushan  on
merit.  Section 621A was inserted by the Companies Amendment  Act,  1988  on
the recommendation of the Sachar Committee.  It was felt  that  leniency  is
required in the administration of the provisions  of  the  Act  particularly
penalty provisions because a large  number  of  defaults  are  of  technical
nature and arise out of ignorance on account of  bewildering  complexity  of
the provisions.  Section 621A of the Act; as stood at the relevant time  and
relevant for our purpose reads as follows:


           “621A. Composition of  certain  offences.-  (1)  Notwithstanding
           anything contained in the Code of Criminal Procedure, 1973 (2 of
           1974), any offence punishable under this Act  whether  committed
           by a company or  any  officer  thereof,  not  being  an  offence
           punishable with imprisonment only, or with imprisonment and also
           with fine, may, either before or after the  institution  of  any
           prosecution, be compounded by-

                 (a) the Company Law Board; or


                 (b) where the maximum amount of fine which may  be  imposed
                 for such offence does not exceed five thousand  rupees,  by
                 the Regional Director, on payment or credit, by the company
                 or the  officer,  as  the  case  may  be,  to  the  Central
                 Government of such  sum  as  that  Board  or  the  Regional
                 Director, as the case may be, may specify:


                       Provided that the sum so specified shall not, in  any
                 case, exceed the maximum amount of the fine  which  may  be
                 imposed for the offence so compounded:


                       Provided further that in specifying the sum  required
                 to be paid or credited for the compounding  of  an  offence
                 under this sub-section, the sum, if any,  paid  by  way  of
                 additional fee under Sub-section (2) of Section  611  shall
                 be taken into account.


                       xx          xx         xx


           (4)(a) Every application for the compounding of an offence shall
                 be made to  the  Registrar  who  shall  forward  the  same,
                 together with his comments  thereon,  to  the  Company  Law
                 Board or the Regional Director, as the case may be.


                 (b) Where any offence is  compounded  under  this  section,
                 whether before or after the institution of any prosecution,
                 an intimation thereof shall be given by the company to  the
                 Registrar within seven days from  the  date  on  which  the
                 offence is so compounded.


                 (c) Where any offence is compounded before the  institution
                 of any prosecution, no prosecution shall be  instituted  in
                 relation to such offence, either by the Registrar or by any
                 shareholder of the company or by any person  authorised  by
                 the Central Government against the offender in relation  to
                 whom the offence is so compounded.


                 (d) Where the composition of any offence is made after  the
                 institution of any prosecution, such composition  shall  be
                 brought by the Registrar in writing, to the notice  of  the
                 Court in which the  prosecution  is  pending  and  on  such
                 notice of the composition of the offence being  given,  the
                 company or its officer in relation to whom the  offence  is
                 so compounded shall be discharged.

                       xx         xx         xx
            (7) Notwithstanding anything contained in the Code of  Criminal
           Procedure, 1973,-

                 (a) any offence which is punishable  under  this  Act  with
                 imprisonment  or  with  fine,  or  with  both,   shall   be
                 compoundable  with  the  permission  of   the   Court,   in
                 accordance with the procedure laid down  in  that  Act  for
                 compounding of offences;


                 (b) any offence which is punishable  under  this  Act  with
                 imprisonment only or with imprisonment and also  with  fine
                 shall not be compoundable.

           (8) No offence specified in this  section  shall  be  compounded
           except under and in  accordance  with  the  provisions  of  this
           section.”


      From a plain reading of Section 621A(1) it is evident that any offence
punishable under the Act, not being an offence punishable with  imprisonment
only or with imprisonment and also  with  fine,  may  be  compounded  either
before or after the institution of the prosecution by the Company Law  Board
and in case, the minimum amount of  fine  which  may  be  imposed  for  such
offence does not exceed   Rs. 5000/-, by the Regional  Director  on  payment
of certain fine.  The penal provisions of  the  Act  provide  for  different
kinds of punishments for variety of  offences  and  can  be  categorised  as
follows:


           i) offences punishable with fine only,


      (ii) offences punishable with imprisonment only,


          ii) offences punishable with fine and imprisonment,

      (iv) offences punishable with fine or imprisonment,


      (v) offences punishable with fine or imprisonment or both.




      Section 211(7) of the Act provides for  punishment  with  imprisonment
for a term which may extend to  six  months  or  with  fine  or  with  both.
Therefore, an accused charged with the offence under Section 211(7)  of  the
Act has not necessarily to be visited with imprisonment or imprisonment  and
also fine but can be let off by imposition of  fine  only.   Therefore,  the
punishment provided under Section 211(7) of the  Act  comes  under  category
(v) aforesaid.  Section 621A(1) excludes such offences which are  punishable
with imprisonment only or with imprisonment and also with fine.  As we  have
observed above, the nature  of  offence  for  which  the  accused  has  been
charged necessarily does not  invite imprisonment or imprisonment  and  also
fine.  Hence, we are of the opinion that the nature of the offence  is  such
that it was possible to be compounded by the Company Law Board.


      Mr. Shankaranarayanan, then submits that sub-section  (7)  of  Section
621A confers jurisdiction on the court to accord permission for  compounding
of the offence punishable with imprisonment or with fine or with  both,  the
jurisdiction of the Company  Law  Board  is  excluded  and,  therefore,  the
Company Law Board erred in acceding  to  the  request  of  the  accused  for
compounding of the offence.          Sub-section (1)  of  Section  621A  and
sub-section (7) thereof are differently worded but on  their  close  reading
it is evident that both cover such offences depending  upon  the  nature  of
punishment.          Sub-section  (1)  of  Section  621A  excludes   offence
punishable with imprisonment only or with imprisonment  and  also  fine  and
includes  the  residue  offences  which  will  obviously   include   offence
punishable with imprisonment or with fine or with both  whereas  sub-section
(7) specifically include those and excludes, like sub-section (1),  offences
punishable with imprisonment  only  or  with  imprisonment  and  also  fine.
Therefore, both cover similar nature of  offences.   Hence,  the  power  for
compounding can be exercised in relation to the same nature of  offences  by
the Company Law Board or  the  court  in  seisin  of  the  matter  with  the
difference that the Company Law Board can proceed to compound  such  offence
either before  or  after  the  institution  of  any  prosecution.   In  this
connection, it shall be relevant to refer to Section 621A(4)b) of  the  Act,
which provides that where any offence  is  compounded  under  this  section,
whether before or after the institution of any  prosecution,  an  intimation
thereof shall be given by the Company to the Registrar within  7  days  from
the date on which the offence is  compounded.   Section  621A(4)d)  mandates
that where the composition of any offence is made after the  institution  of
any prosecution, such composition would  be  brought  by  the  Registrar  in
writing to the notice of the court in which the prosecution is  pending  and
on such notice of the composition of the offence being  given,  the  accused
in relation to whom the offence is so compounded shall be discharged.




      From the conspectus of what we have observed above, it  is  more  than
clear that an offence committed by an accused under the Act,  not  being  an
offence punishable with imprisonment only  or  imprisonment  and  also  with
fine, is permissible to be  compounded  by  the  Company  Law  Board  either
before or after the institution of any prosecution.  In view of  sub-section
(7) of Section 621A, the criminal court  also  possesses  similar  power  to
compound an offence after institution of the prosecution.


      Now the question is whether in the aforesaid circumstances the Company
Law Board can compound offence punishable with fine or imprisonment or  both
without  permission  of  the  court.   It  is  pointed  out  that  when  the
prosecution has been laid, it is the criminal court which is  in  seisin  of
the matter and it is only the magistrate or  the  court  in  seisin  of  the
matter who can accord permission to compound the offence.  In  any  view  of
the matter, according to the learned counsel, the Company Law Board  has  to
seek permission of the court and it  cannot  compound  the  offence  without
such permission.  This line of reasoning does not  commend  us.   Both  sub-
section (1) and sub-section (7) of Section 621A of  the  Act  start  with  a
non-obstante clause.  As is well  known,  a         non-obstante  clause  is
used as a legislative device to give the enacting part of  the  section,  in
case of conflict, an overriding  effect  over  the  provisions  of  the  Act
mentioned in the non-obstante clause.


      Ordinarily, the offence is compounded under the provisions of the Code
of Criminal Procedure and the power to accord  permission  is  conferred  on
the  court  excepting  those  offences  for  which  the  permission  is  not
required.  However, in  view  of  the  non-obstante  clause,  the  power  of
composition can be exercised by the court or the  Company  Law  Board.   The
legislature has conferred the same power to the Company Law Board which  can
exercise  its  power  either  before  or  after  the  institution   of   any
prosecution whereas the criminal court has no  power  to  accord  permission
for composition of an offence before  the  institution  of  the  proceeding.
The legislature in its wisdom has not put the rider of prior  permission  of
the court before compounding the offence by the Company Law  Board   and  in
case the contention of the appellant  is  accepted,  same  would  amount  to
addition of the words “with the prior permission of the court” in  the  Act,
which is not permissible.


      As is well settled, while interpreting the provisions  of  a  statute,
the court avoids rejection or addition of words and resort to that  only  in
exceptional circumstances to achieve the purpose of Act or  give  purposeful
meaning.  It is also a cardinal rule of interpretation that  words,  phrases
and sentences are to be given their natural, plain and clear meaning.   When
the language is  clear  and  unambiguous,  it  must  be  interpreted  in  an
ordinary sense and no addition or alteration of  the  words  or  expressions
used is permissible.  As  observed  earlier,  the  aforesaid  enactment  was
brought in view of the need of leniency in the  administration  of  the  Act
because a large  number  of  defaults  are  of  technical  nature  and  many
defaults occurred because of the complex nature of the provision.


      From what we have observed above, we are of the opinion that the power
under sub-section (1) and sub-section  (7)  of  Section  621A  are  parallel
powers to  be  exercised  by  the  Company  Law  Board  or  the  authorities
mentioned therein and  prior  permission  of  Court  is  not  necessary  for
compounding the offence, when power  of  compounding  is  exercised  by  the
Company Law Board. In view  of  what  we  have  observed  above,  the  order
impugned does not require any interference by this Court.






      In the result, we do not find any  merit  in  the  appeal  and  it  is
dismissed accordingly but without any order as to costs.


                                  ………………………………………………………………J
                                                             (CHANDRAMAULI
                                  KR. PRASAD)






                                                    ………..……….………………………………..J
                                       (V.GOPALA GOWDA)





NEW DELHI,
MAY 10, 2013.
-----------------------
21